1Q18 core PATAMI of RM14.0m came in above expectations compared to our FY18E core losses of RM29.0m and consensus FY18E core PATAMI of RM16.6m, due to the higherthan-expected sales and margin. Thus, we upgrade our FY18- 19E to core PATAMI of RM46.9m and RM52.4m, respectively from core losses of RM29.0m and RM13.1m. Upgrade to OP with a higher TP of RM2.30 (from MP and TP of RM1.80).

1Q18 above expectations. 1Q18 core PATAMI of RM14.0m came in above expectations compared to our FY18E core losses of RM29.0m and consensus FY18E core PATAMI of RM16.6m, due to the higherthan-expected sales and margin. This marks the first quarterly earnings improvement, after 8 successive quarters of disappointments. No dividend was declared for the quarter, as expected.

YoY, 1Q18 revenue increased 4% even though its Nissan vehicles sales declined to 5,310 units (-17%) as per MAA statistics. The higherthan-expected revenue was attributed to its favourable sales mix as TCHONG is focusing more on higher margin models of its popular MPV (Nissan Serena), sports utility vehicle (Nissan X-Trail) and pick-up truck (Nissan Navara). Correspondingly, at EBIT level, the group posted a profit of RM23.6m compared to losses of RM22.2m in 1Q17 attributed to the favourable sales mix and further supported by the stronger MYR against USD. Consequentially, the group posted core PATAMI of RM14.0m compared to core losses RM31.5m in 1Q17, after 8 quarters of disappointment.

QoQ, 1Q18 revenue decreased by 4% in line with Nissan vehicles sales declining by 11% as per MAA statistics due to seasonally stronger 4Q. Correspondingly, at EBIT level, the group registered lower profit of RM23.6m compared to a profit of RM27.1m in 4Q17. Nevertheless, the group posted core PATAMI of RM14.0m compared to core losses of RM6.9m in 4Q17 from the lower taxation of RM11.4m (4Q17:RM18.8m) and higher interest income of RM4.2m (4Q17:RM2.9m).

Outlook. TCHONG has shifted its strategy from volume-play to profitmargin-play as it is focusing more on higher margin models such as Navara, X-Trail and Serena, thus, car sales volume will only be able to register single-digit growth as traditionally, outgoing B-segment model (Nissan Almera) contributed 30% of its car sales. Nevertheless, the group has recently launched the all-new 2018 Nissan Serena S-Hybrid (CKD) in Mid-May 2018, which is expected to sustain its car sales volume above the previous year. We understand that booking for the all-new Serena has passed the 1,000 booking mark as of to-date. Moving forward, the group is expanding its Indochina operations given the larger market volume, and we foresee that the recent strengthening of MYR against USD will be able to improve its profitability, on top of the high-margin car models sales.

Upgrade FY18E and FY19E to core PATAMI of RM46.9m and RM52.4m, respectively, from core losses of RM29.0m and RM13.1m, to reflect higher-than-expected sales and margin.

Upgrade to OUTPERFORM with a higher TP RM2.30 based on the revised 0.52x FY19E BVPS at its 3-year historical forward mean, implying PER of 28x (from MARKET PERFORM with a TP of RM1.80 based on 0.41x FY18E BVPS implying -0.5SD below the 3-year historical forward mean). We like the stock for its: (i) turnaround in earnings after two consecutive years of losses with its current focus on high-margin vehicles, (ii) expected expansion of its Indochina operations for a larger market share volume, and (iii) a stronger MYR. Risks to our call include: (i) lower-thanexpected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 21 May 2018